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Financial Post Business

Blown Away
Sat Mar 1 2008
Page: 30
Section: Financial Post Business Magazine
Source: National Post
Illustrations: Color Photo: Photography By Kevin Hewitt / (See hardcopy for Illustration)

Color Photo: Photography 2001 The Record, Waterloo Region, Ontario Canada / Geosign founder Tim Nye
(right, in 2001) declined comment for

Color Photo: / Ex-CEO Ted Hastings survived Geosign to take on the top job at

It started simply as another "town hall." No numbering more than 250. There, they
surprise in that -- Geosign Corp. employees would keep building their online media
were used to town-hall meetings because "powerhouse." Geosign boasted a network
they happened almost monthly. Staff would of 180 websites, with consumer news and
leave the office, pile into cars and make the information content ranging from hockey
short drive to the Holiday Inn on the south to girlfriends to lawn furniture. It said it
edge of sleepy Guelph, Ont., where had created a technology that drove traffic
Geosign was located. Once assembled, to its sites through placements in search
they'd typically get an earful from engines, with up to 35 million unique
management about the business, new visitors landing each month. Given the
initiatives and big plans for the future. red-hot interest in Internet advertising,
American Capital managing director
The only difference this late May day was Virginia Turezyn said Geosign's true value
that the meeting had been hastily arranged, lay in its "automated systems," not its
with employees directed to the hotel that content.
morning. But why worry? Just 12 weeks
earlier, Geosign had joined the elite list of For everyone arriving at the Holiday Inn,
hottest Web companies in the world. After the future seemed golden. But as soon as
operating for seven years in they were assembled, things turned strange.
near-anonymity, an hour's drive from the Each employee was handed an envelope. In
prying eyes of Bay Street, Geosign landed the envelope was a piece of paper with a
the largest-ever venture-capital investment geometric shape on it -- triangle or square.
for a Canadian tech company: $160 That's when the bomb dropped. Hastings
million, for which U.S. investor American told the assembly that there had been a
Capital Strategies Ltd. got a "significant" massive change to the company's business
minority stake. At that time, Geosign said model, brought about by search engine and
it had more than $100 million in sales. And Web advertising giant Google Inc. It would
it was hiring new employees like crazy. At require massive adjustments, but Geosign
the previous town hall in mid-April, CEO would persevere, he said. Stunned
Ted Hastings, who took over from employees tried to decipher what was
Geosign's founder and chairman Tim Nye happening. Many had just joined the
that January, discussed a new facility they company to create "webzine" content
were planning for all the staff, then packages for its sites. What did Google

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have to do with their online magazines
anyway? The same question occurs to everyone:
How did a business making $100 million a
Those with triangles in their envelopes year, a company so full of promise,
were directed to speak with human disintegrate so quickly? With Geosign, it
resources staff on the premises. Regardless turns out, there's more to the tale than
of their circumstance or how long they'd anyone directly involved has so far been
been with the firm, the triangle indicated willing to say. And much of it revolves not
their time at Geosign was over. Between 50 around its plans for a content powerhouse,
and 100 people were cut that day, with but the story of how the Guelph startup
many more to follow. "It was awful," says found a loophole in Google's vaunted
one former employee. "None of us knew advertising model, enabling it to make
what was happening. It didn't make sense. boatloads of cash -- until Google decided
The woman standing next to me had just enough was enough.
quit her job and moved to the city to start.
She burst into tears when she realized she'd It's hard to know exactly what Tim Nye
just been fired." had in mind when he established Geosign
in 2000, the same year Google launched its
Companies fail all the time. Sometimes first keyword-targeted ad program, the
with little warning. But companies that are money-spinner at the core of its enterprise.
highly profitable and only weeks removed "Geosign wasn't much more than a shell at
from a record-setting venture capital that time," says Jim Estill, CEO of Synnex
investment? Not so much. Yet in Geosign's Canada, a Toronto-based computer
case, the cuts that began last May distributor, who invested in two of Nye's
continued through the summer. Late last earlier ventures. "But it had Tim, and he's
year, fewer than 100 employees remained. one of those consummate entrepreneurs
Today, Geosign itself no longer exists, its who fails sometimes but keeps coming up
still-functioning website an empty with new ideas." Nye's first company,
reminder of its former promise. And while Carbotek Computing, had been a computer
the national business media has, until now, parts distributor. His second, a software
overlooked the story -- surprising, given company called CadSoft, was a "marginal
the size of the investment and the fact that success" according to Estill. Nye sold that
Google played a direct role in the outcome in 1998.
-- within Canada's technology and
venture-capital communities, the Estill says Nye bucked conventions, wore
$160-million investment is known as the his hair long, preferred jeans to suits and
deal "that didn't go well." When the had bold ideas. "He's technically creative,
collapse happened, even jaded industry the type who knows what computers can
watchers accustomed to financial debacles do," he says. "There's a tendency in the
in the tech sector were stunned. "I've seen a press to make everyone either a dog or a
lot of meltdowns," says Duncan Stewart, a god. The truth is most people are
technology and investment analyst in somewhere in between. Tim is no different.
Toronto. "But something happening like He has shortcomings, but he's also a highly
this, over just a few weeks, that's creative guy."
unprecedented in my experience."

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Retracing Geosign's origins through old forward on the advertising side, with the
news stories, Nye sounds like he spent launch of its AdSense program. Essentially,
considerable time searching for a business this application allowed people to put
model. In early interviews, he described keyword-targeted ad links, served by
Geosign's business in vague terms, Google, on their own websites, with them
suggesting it was somehow linking online and Google splitting revenue tied to the
consumers with local businesses. "The volume of user click-throughs. As its
market is connecting buyer to seller, and up popularity grew, a cottage industry began
to now, the consumer has been left out," to develop called "search arbitrage."
Nye told the Guelph Mercury in 2001. He Essentially, search arbitrage involves an
called his new technology "geosearching," individual or company buying Internet
and added that his company had inked an traffic through the acquisition of keywords
arrangement with an Internet search from Google, then sending viewers who
engine, but wouldn't disclose the name. click on the ad links to a site ("landing
Still, he told confidantes and investors that page" in Google terminology) that appears
he had grand ambitions for Geosign to have content, but is actually just full of
extending far beyond Guelph, concepts that online advertising linked to the original
would create a business with huge upside. search term. Anyone clicking an ad link
Not that anyone outside of a small circle there makes money for the keyword holder.
knew of Nye's plans. For the next five For example, a company might bid for the
years he stayed out of the limelight. Even Google rights to the phrase "small town car
in a small city like Guelph, he and Geosign sales" and send traffic to a website it
garnered no media attention. controls, filled with more car
advertisements, called
Meanwhile, as Nye tinkered away in "Alltheautomotive.com." The keyword cost
silence, Google was doing just the only 20ó, while a click on the advertising
opposite, laying claim to the title of most on the website might yield $1.50 return.
popular search engine. More significant, According to Niki Scevak, an analyst at
perhaps, was the success of its Jupiter Research in New York, the majority
keyword-targeted ad program. To recap, of those initially involved in search
Google began selling advertisements arbitrage were small players. "These were
associated with keywords that would be guys running search arbitrage out of their
searched by Internet users. Pricing of basements, making maybe $20,000 a
keywords was based on a combination of month," he says.
bidding and click-through use. As Google's
popularity soared, so did the price it could As the possibilities of the arbitrage
charge for linking an ad to a keyword. For business became apparent, however, other
example, if your company wanted the more ambitious players got interested. One
phrase "car accident lawyer," it could cost of them, it seems, was Geosign. While both
upwards of US$38 per click to have the Nye and Hastings declined to comment
most prominent ad link on the Google page when contacted for this story, former
when that term was searched. Less Geosign insiders who spoke on the
common phrases cost less, as little as 5ó. condition of anonymity confirm that the
possibility of a big payoff in search
In 2003, Google made another huge leap arbitrage caught Nye's attention after he

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created Geosign. What's more, he weren't necessarily of where the money
envisioned a network of thousands of was coming from, especially as the
websites all automated by software linking websites they designed struggled to find an
keywords to pages filled with ads, audience. "It didn't make any sense to me,"
returning millions in cash in the process. says another former employee -- one of
many contacted through a Facebook group
By 2005 that was exactly what was set up after the first big round of layoffs
happening. Nye crafted a maze of Internet last May. "There was all this money
sites that included tens of thousands of around, but the website I was working on
Web pages and bought up even more had like 1,500 visitors a day."
keywords from Google. By connecting the
keywords and the websites, Geosign was There were other oddities, as well. One
indeed generating more than $100 million Geosign staffer recalls being asked to work
in annual revenue and was extremely through weekends in late 2006, in order to
profitable. To put a value on the company add text to Web pages that appeared to be
at this time, analyst Scevak points to nothing but ads. "They told us it could be
Marchex Inc., a publicly traded company in our B-grade writing," the ex-employee
Seattle, Wash., with a comparable business says. "We were writing for strange sites
model. At its peak in 2006, Marchex had a like roundtables.info and sticks. info. And
market capitalization of US$500 million. we were just writing a paragraph or two. It
didn't seem to matter what we wrote."
Meanwhile, Nye began to run Geosign like
his version of a California dot-com at the The change in atmosphere had everything
peak of the investing craze in the late to do with measures that Google was taking
1990s. He brought three Segway Personal to rein in those doing search arbitrage. This
Transporters into the office. "They didn't action was a response to two main
make any sense at all given the size of our concerns. First, that the practice was
offices," says one former employee. "But becoming so widespread, it was hurting
we used them anyway." Wolfgang Puck legitimate advertisers by artificially
gourmet coffee makers were soon inflating keyword prices. And second, that
introduced, free Perrier abounded and if too many keyword-targeted ad links only
rumours circulated that staff lunches would took users to pages filled with other ads,
soon be catered. A lavish Christmas party that users would lose interest and faith in
thrown at the end of 2006 saw employees the online ad system. Obviously, with
head home with iPods and gift certificates advertising revenue being the key to
worth of up to $1,000. The grand prize was Google's finances, it had to respond. It did
a lease on a Toyota Prius. Fittingly, Nye so by expanding the terms of service for its
dressed as Santa for the event. "It was AdSense program (published on its
amazing while it lasted," says another website) to place greater restrictions on the
former employee. way links could be used and by spelling out
detailed landing page and site quality
Even as the perks flowed, many Geosign guidelines. A top priority there: relevant
employees, especially those the company and original content. By these standards, a
hired in 2006 to start developing a new landing page full of ads is inadequate -- as
online publishing division of the business, this text in its current guideline explains:

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"Provide substantial information. If your ad say, was to develop a legitimate content
does link to a page consisting mostly of ads business before Google cracked down on
or general search results (such as a its arbitrage angle. This explains why
directory or catalog page), provide Geosign quickly began hiring so many
additional, unique content." Since most reporters and editors, and why it begin to
companies doing search arbitrage bought talk about itself as a big-time online media
both their keywords and landing page ads play.
through Google, it was easy for the
company to isolate and monitor them. Nye knew he had to move fast. He also
Noncompliant parties risked being banned knew he needed to make acquisitions on
from the AdSense program. A simpler both the content and advertising sides of
tactic, however, saw Google target those the business. That would require more cash
abusing the process, raising their fees and than Geosign had on its own. Soon, Nye
making it too costly to continue. began seeking venture capital and
private-equity investments. In early 2007,
For the moment, Nye and Geosign were American Capital, which calls itself an
still a step ahead. Instead of buying ads and "alternative asset" management firm, won
keywords from Google, Geosign had out over several suitors.
always purchased keywords from the
search engine company and directed the The deal was announced in the first week
traffic to sites filled with ads from rival of March. But even that had an odd twist.
Yahoo! That meant Google was receiving Nye was not available for any interviews,
millions of dollars from Geosign for access with the exception of some comments he
to its keywords, but didn't know where the gave to a couple of tech industry bloggers.
traffic was directed. Given the amount of In one case, he said the money was critical
money flowing to Google, most in Geosign to his "BFE -- big empire strategy. I forget
thought the search engine would turn a what the 'f' stands for." For his part,
blind eye. Hastings only spoke publicly for a very
short time before he, too, clammed up.
But not Nye. Geosign insiders say Nye
voiced concerns that Google could A source inside the company says their
eventually move against arbitrageurs behaviour stemmed from fears that the
utilizing the Yahoo! model. That left him more they talked, the more they would
with a decision -- to continue running attract Google's attention. For this same
Geosign and hope Google would continue reason, some insiders had
to accept the company's money even if it
didn't like the business model, or to search apparently advised against partnering up
for something that might one day replace with American Capital prior to the deal,
the arbitrage revenue. With the online because it was a public company and
advertising market for content-oriented therefore had to disclose the investment.
sites growing rapidly, Nye decided to move
into Web publishing. He purchased still While no one at American Capital would
more domain names and began hiring staff comment for this story, sources say it was
to create "webzines" focused on everything well aware of how Geosign made its
from sports to travel. Nye's plan, insiders money and what it was planning going

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forward. It was, in other words, placing a Ultimately, American Capital reached a
bet that Google would not take steps that settlement with Nye that saw two new
would alter Geosign's lucrative business. companies created. American Capital got
"Since we didn't know Google like we do control of Geosign's marketing and
now, the question always was, 'Is someone advertising assets and spun it off in a new
really going to shut off the kinds of dollars company called Moxy Media Inc., with
we were paying them?'" a former Geosign ex-Geosign CEO Hastings as chief
employee says. "It turns out the answer was executive. In early January, a spokesperson
yes." for Moxy Media confirmed that it has
about 50 employees and had recently
The end came suddenly, well before Nye acquired Florida-based SWI Digital Inc.
and American Capital could reposition the "Life goes on," says one insider. "You
business -- in fact they were still hiring might not be thrilled with where it is,
new employees in the days leading up to considering what it had been, but search
the layoffs. Google had started to look marketing is still a viable business."
more closely at companies like Geosign, American Capital's latest securities filings
which were buying keywords from Google peg Moxy Media's value at US$128 million
and ad links from Yahoo! or another -- which means the sum of Geosign's
provider. And soon Geosign got word that former assets are worth less than American
Google would now begin penalizing its Capital's original minority investment.
Web pages that had "a low landing page
quality score" -- that is, lots of ads and little Besides remaining tight-lipped about its
or no original content. While Google won't Geosign experience, American Capital has
comment specifically about Geosign, apparently tried to keep a tight leash on
sources say it raised the prices it charged Geosign's former employees, many of
Geosign for keywords overnight. "When whom were asked to sign a non-disclosure
Google 'shuts you down,' that isn't exactly agreement before receiving their severance.
what they do," explains Jupiter's Scevak. An employee who spoke with the Guelph
"Instead, what they do is start charging you Mercury was sent a letter warning about
$50 for what they were charging 10ó for the repercussions of talking with the media.
previously. They make the model
financially unfeasible." As for Nye? He came away from the
breakup with what one former executive
Sources say the American Capital deal describes as "assets with little value" -- a
included provisions whereby it would few domain names, such as hockey.com
recover its money if things fell apart. "As and golfcourses.com, a few staff and little
any private-equity firm does, they find a else. He created a new company called
way to make sure they come out OK," says eMedia Interactive Inc., where he is listed
one former Geosign executive. "If they are as chairman.
going to put $160 million into a company,
they are going to make sure that if A final attempt to contact him to see if he'd
something bad happens, they are holding be willing to put his version of events on
the keys to the castle." the record for this story yielded a short
response. "As part of the transition, I
Negotiations dragged on through 2007. signed a confidentiality agreement, which

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would prohibit any comment from me," he Innovance Networks Inc.
wrote in an e-mail. "I have some exciting
things in the works. But I am not $ 115 12/ 5/ 00 Next-generation platform
comfortable adding anything else at this for photonic transport
time."
Hyperchip Inc.
In time, he might talk about his new
venture, he says, but there is "no benefit for $ 100 9/ 1/ 00 Developer of core IP
any press at this time." Those close to Nye systems
say he did very well financially with
Geosign even before the American Capital Oanda Corp.
deal, has a home in Barbados, and often
uses a local service to charter private jets. $ 100 9/ 17/ 07 Automated online currency
Even though his dream of creating a trading
publishing empire in Guelph seems to have
ended -- a handful of staff were recently let Ceyba Inc.
go from eMedia -- those around him
wouldn't be surprised if he resurfaces with $ 93 5/ 31/ 01 Develop/ deploy optical
another company. "There won't be any networking solutions
penny sales for him," says Estill, who
thinks Nye could produce a lasting hit if Q9 Networks Inc.
the right concept catches his fancy. "He
knew he was living on borrowed time at $ 89 4/ 10/ 01 Internet infrastructure and
Geosign. He had a golden gooseùit just managed services
didn't lay eggs forever."
Innovance Networks Inc.
CANADA'S 10 LARGEST TECH VC
INVESTMENTS $ 88 2/ 25/ 02 Next-generation platform for
photonic transport
Geosign isn't the only failure in this group
-- but none fell as far or as fast Catena Networks

Company Amount ($ mil) Date Business $ 75 1/ 23/ 02 Broadband access systems
Description builder

Geosign Technologies Inc. Hyperchip Inc.

$ 160 3/ 9/ 07 Online publishing and Financial Thomson source: $ 70 1/ 18/ 02
targeted searches Developer of core IP systems

Norigen Communications Group Inc.

$ 122 3/ 31/ 00 Competitive local exchange
carrier

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